At 26, Peter Hicks says his main financial priority is paying off his student debt. After graduating with a business degree, Hicks went on to study for an MSc in International Business and Management, requiring extra funding on top of his student loan.
Hicks says: “This additional loan has a higher interest rate than the student debt I took out for my original history degree. The bank lets me know what the minimum repayment is each month, but I want to try and pay it back far quicker, as this will save me money in the long run.”
Since starting work in financial services, Hicks is trying to save around £250 a month to pay off this debt. He is looking forward to wiping out this debt, and using these surplus funds to invest for his future instead.
“At the moment, I just have to be patient – which isn’t always easy. It doesn’t seem to make sense to try to save or invest, when I’m likely to be paying more in interest charges on these loans,” he says.
Although his plans for an ISA portfolio have been put on hold, he is taking advantage of his workplace pension. Hicks, who lives in London, says that he wanted to make sure he made the most of his employers’ contribution, plus the tax relief. “It’s still a relatively small amount being invested each month, but I’m hoping that over time this will grow to be the bedrock of my finances.”
A Long Term Investment Horizon
As Hicks points out, he is not expected to retire to the age of 75, so this gives him a 49-year investment horizon.
“On these time scales I can afford to take a bit of risk with this money,” he says. “I’d ideally like to retire before that. Many people my age half expect that we will be working until we drop. I think they will keep pushing back the state retirement age so it makes sense to build my own savings pot.”
His employer, Chelsea Financial Services, allow pension scheme members to pick which funds they want to invest in.
He splits his monthly investment between four funds: Fundsmith Equity, Baillie Gifford Japanese Smaller Companies, Baring ASEAN Frontiers fund and Schroder Small Cap Discovery Fund.
Hicks says: “These are all growth funds, and all actively managed. Three of these funds invest in Asian and frontier markets, but Fundsmith Equity is more focused on larger cap holdings.”
Hicks hopes this gives his portfolio a degree of ballast.
Fundsmith Equity Delivers Consistent Returns
Fundsmith Equity, managed by the veteran fund manager Terry Smith has certainly been an outstanding performer in recent years. It has five-star rating from Morningstar and a coveted Gold rating.
Morningstar analyst Peter Brunt says: “This is one of the strongest options for investors seeking exposure to high quality global equities.” Brunt describers the fund manager as “an original thinker” who “has often demonstrated his willingness to bet against the crowd”.
Brunt adds: “Smith’s investment philosophy is to buy and hold, ideally forever, high-quality businesses that will continually compound in value. High-quality companies are defined as having little need for leverage, an above-average cash return on operating capital employed, and an ability to sustainably grow at this rate of return.”
Looking to Frontier Markets
Baring ASEAN Frontiers fund has a four-star rating from Morningstar, reflecting its strong performance against peers in recent years. It invests in less developed Asian markets – and excludes Japan. This means returns are likely to be volatile over the longer term.
But in recent years it has delivered decent returns for investors. The fund has delivered a 10.63% return over the past year, and a 7.64% return over three years, according to Morningstar data.
Like the Baillie Gifford fund, the Schroder Small Cap Discovery fund also invests in Asia, as well as other emerging markets. This combination of smaller companies, plus emerging markets makes it a higher risk fund.
Over three years the fund has delivered a 9.52% return, and over five years it has made a 11.37% return for its investors.
Hicks says: “I realise that this are higher risk funds, but over the longer term I believe it is these sectors that have the potential to deliver superior returns.
“I know there will be periods where the performance blows up. Hopefully I will have the good sense to simply keep investing on a monthly basis.”
Hicks says at the moment “pensions look like a great deal for investors” and he is hoping that the Government does not water down the tax benefits of these savings plans.
“I’m looking forward to getting the opportunity to invest more widely. I’d like to invest into other geographical areas and perhaps diversify when it comes to investment style,” Hicks says.
“If I was investing in the US I’d be more interested in passive strategies, but for now I think actively managed funds give me the best chances of building my pension pot.”
